Former chairman of the US Federal Reserve Alan Greenspan has warned investors to get ready for a painful correction in the stock market, as it cannot stabilize and unlikely to muster another rally.
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“It would be very surprising to see it sort of stabilize here, and then take off again,” Greenspan said in an interview with CNN Business. “Markets could still go up, but at the end of that run, run for cover.”
The stock market has already stopped its bull run and is beginning to tumble, according to the famed economist, who is citing the reaction over the recent days. On Tuesday, stocks managed to stabilize after Monday’s big tumble that knocked US indices to their lowest levels in over a year.
Concerns over the slowing global economy and trade disputes have been keeping stocks in decline since October. As of Monday, the benchmark S&P 500 and the blue-chip Dow Jones Industrial Average were on track for the worst December since 1931, when stocks were crushed during the Great Depression.
Greenspan served as Fed chair from August 1987 until January 2006. His comments came a day before the current head of the US Federal Reserve, Jerome Powell, is widely expected to announce another possible interest rate hike along with the central bank’s forecast for next year.
The expected increase of the key rate would become the fourth this year, and ninth since the financial crisis. Greenspan added that he has observed a “pronounced” rise in real long-term interest rates, the “key factor which is bringing the stock market down.”
“In fact, it accounts for all of the weakness recently, and I think it’s going to continue to account for it, because we’re in a period now where I think long-term rates are going to rise,” the economist said.
According to Greenspan, the US economy faces a so-called “stagflation” environment with both price inflation and a weakening economic backdrop.
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